Presented by: Special Products Team Asset Management Department ...
Bond Basics
Presented by: Special Products Team Asset Management Department Multifamily Division, Freddie Mac
July 2009
1
Bond Training ? Part 1
What is a Bond?
Debt Security purchased by investors known as bondholders
Pays interest to bondholders at a specific rate ? often a fixed rate; however most of the Freddie Mac credit enhancements are on floating-rate bonds
Repays principal at a specified time or times
2
Bond Training ? Part 1
What is a Bond? cont'd
Liquid ? Can be sold anytime up to maturity
Risk is assessed and rated by rating agencies for the bonds that Freddie Mac credit enhances (many in the marketplace are unrated)
Bonds credit enhanced by Freddie Mac are secured by mortgages
3
Bond Training ? Part 1
Private Activity Bonds
State and Local government entities issue bonds to attract private investments for projects that have some public benefit, including multifamily rental housing
Annual volume of private activity bonds is limited by federal law based on state population. States allocate "bond authority" to individual qualified properties
4
Bond Training ? Part 1
Private Activity Bonds cont'd
Interest received by bondholders is exempt from federal and most state income tax
Tax exemption allows a higher rate of return for bondholders while keeping the bond interest rate low
? Bondholders do not pay federal income tax on interest earned so they are willing to receive less interest compared to taxable investments and still get an acceptable tax adjusted return
? Interest is also exempt from most State Income Tax for a holder that pays income tax on interest in that state
5
Bond Training ? Part 1
Multifamily Housing Bonds
Private activity bonds can be used to finance construction or rehabilitation of affordable privately-owned multifamily rental housing
Internal Revenue Code imposes restrictions on the property which vary according to the date the bonds were issued and whether or not low-income housing tax credits are included
6
Bond Training ? Part 1
Multifamily Housing Bonds cont'd
State and local government entities allocating or issuing bonds may impose additional restrictions on the property
Sometimes additional restrictions are added based on subsidies provided by state or local governmental entities
7
Bond Training ? Part 1
Restrictions on Multifamily Housing Bonds
Income eligibility restrictions apply to all properties For bonds issued prior to 1986, 20% of the units must be rented
to families earning not more than 80% of Area Median Income (AMI) For bonds issued after 1986
?20% of the units must be rented to families earning not more than 50% of AMI adjusted for family size, or
?40% of the units must be rented to families earning not more than 60% of AMI adjusted for family size
8
Bond Training ? Part 1
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